Investors’ Risks for Investing on Unregulated Financial Markets

In a bid to diversify their investment portfolio or seek investment opportunities with high returns, some Tanzanians’, especially the youth, have been taking investment risk on investment opportunities that have the potential of exposing them to high and unmitigated risks. In their pursuit of outsized returns some of these investors temporarily seems to have forgotten the misery that befell investors who participated in various forms of Ponzi and/or Pyramids schemes which similarly promised returns that were clearly unsustainable (if could be achieved at all), but still people fell into them.

To this day, part of these investors who lost funds in those schemes are still hoping that they will get some form of compensation someday, which may be a challenge, considering the fact that these entities were not under the supervision of any regulator, neither the Capital Markets and Securities Authority, nor the Bank of Tanzania, but these investments were also not insured in any way, which could have provided a form of relief to investors’ protection, in cases of such loses.

What is at stake? the onset of technology, which by and large have made financial transactions more efficient among other positive disruption attributes, has also come with the exposure to unregulated investment opportunities offered mainly through online platforms. While there are still discussions around the regulation of virtual/crypto and other form digital currencies and digital assets in various jurisdictions around the World, probably including Tanzania, but so far Tanzanians are quietly investing in such emerging investment areas such as Initial Currency Offerings (ICOs) and other forms of unregulated online foreign exchange and currency trading, unfortunately to their own peril.

As it stands, most of the entities offering such alternative investment opportunities may not be licensed whatsoever, which exposes investors to both high and unmitigated risks. While some of the investment platforms and activities have caught the attention of our regulators, but it has been only to the extent of issuing cautionary notices and warnings to the public, for the public to beware of the fact that such financial products and services are unregulated and may be risky. So far there is not action that has been taken to protect investors, and there may be many Tanzanians out there who are potentially exposed to such instruments which promises greater investment returns as it goes with some greater excitement for individuals with quick returns’ investment approach.

As we observe, to attract investors, most of the entities involved in these programs seem to promise outsized returns which may not be sustainable in the long run. Global trend in the unregulated digital currencies demonstrate that crypto (and other digital) based assets market is uncertain and has experienced accelerated boom and burst cycles which may expose investors to substantial losses.

At the global level, International Organization of Securities Commissions (IOSCO), the international body that brings together the world’s securities regulators, to which our capital markets regulator is a member, has identified several risks associated with Initial Currency Offerings (ICOs), for instance. These include: heightened potential for fraud as these products are mainly internet-based; cross-border distribution risks – i.e. difficulties in recovery of investors’ funds in the event of a collapse, particularly in cases where the ICO is operating outside the investment jurisdiction; information asymmetry – where retail investors’ may not be able to understand the risks, costs and expected returns arising from investments; and also liquidity risk – where cases of insufficient liquidity to support reliable trading and market-making activities may be hindered.

There are also unmitigated risks in online foreign exchange trading through platforms of unlicensed entities, where investors risks losing their investments and may not be protected by the law. While in the near future regulators (such as the BOT and CMSA) may consider coming up with tools and mechanisms for protecting investors in these global financial and capital market activities, local investors are meanwhile cautioned and advised to avoid participating in investment opportunities offered by unregulated and unlicensed entities, as there may be no recourse in the event of a collapse and/or loss of their investments.

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